Australia’s jobs picture is getting uglier

CNBC's Matthew Taylor reports that Australian employment dropped 3,700 last month. Sean Darby, Chief Global Equity Strategist at Jefferies, weighs in on what that means for the central bank.

Australia's employment picture continued to deteriorate in January as the job market showed further contraction, blurring the prospect of potential tightening by the central bank to rein in inflation.

The Australian Bureau of Statistics reported on Thursday that the number of people employed last month fell by 3,700, stunning analysts who were expecting a rise of 15,000, according to a Reuters poll.

Job seekers at a jobs and skills expo run by the Australian government in Melbourne, Australia.

The trend appears to be spreading to other parts of the economy –Toyota announced earlier this week that it will stop producing cars in Australia by 2017, which will result in 2,500 job losses. Toyota's decision follows similar moves by Ford Motor and General Motors who will be exiting the country in the next few years.

"The labor market remains the weakest part of the Australian story," economists at HSBC wrote in a note. "Timely indicators, including housing approvals, retail sales and business conditions have all lifted in recent months, but this is yet to support hiring."

The Australia dollar was sharply lower on the news, tumbling more than half a U.S. cent to $0.8952.

"It's interesting reaction from the currencies. The currency market's telling you the rate decision's going to get pushed back again," said Sean Darby, chief global equity strategist at Jefferies, referring to recent speculation that the Reserve Bank of Australia (RBA) could begin a tightening phase to curb inflation, especially in its frothy housing market.

"Australia will still probably be on some form of a tightening phase given the inflationary outlook and may have to live with some deterioration in the jobs data in the short term," he added.

According to Chris Weston, chief market strategist at IG, the job report is unlikely to sway the RBA, given the lagging nature of the indicator.